Market Blog
US and International Equities
The major market indexes finished the week lower. Vaccine progress was outweighed by concerns over rising COVID-19 cases, a lackluster jobs report, and increasing concerns about whether Washington will deliver a fiscal stimulus deal. International markets also finished the week lower. Emerging markets (MSCI EM Index) outperformed their developed international counterparts, as denoted by the MSCI EAFE, by more than one half percent. Moreover, the real estate, financial, and technology sectors trailed the broad market this week.
Energy’s Boom and Bust in 2020
Energy was again a standout this week, carrying its strength from November into a second straight week of top-performer status and the only sector to finish the week higher. Even though the sector has been the worst performer year to date, it has been by far the best performing sector for the rolling one month period. Last Thursday’s OPEC meeting, where members agreed to gradual production increases, was well received by market participants and helped continue this sector’s run this week.
Small Cap Stardom
The Russell 2000 was a bright spot this week, bucking the market's downtrend by returning over 0.5% for the week. LPL Research upgraded small caps to neutral this past September given that a likely new economic expansion was gaining some steam. For more of our thoughts on small caps, please read the Weekly Market Commentary, Three Reasons We Like Small Caps.
One of the hallmarks of a healthy bull market is strong breadth, meaning strong participation. Recently, more than 90% of the stocks in the S&P 500 Index were above their 200-day moving average, the highest level since 2014. Historically, stocks have done quite well when there was this much breadth. For more on this, please see the LPL Research blog titled Outlook 2021: The Bull Market in Stocks Continues.
Fixed Income, Currencies, and Commodities
Bonds, as represented by the Bloomberg Barclays US Aggregate, finished fractionally higher for the week. The 10-year Treasury note traded higher as yields declined. Many bond sectors traded marginally higher this week.
Oil continued its streak of five consecutive weekly gains. The price of WTI crude this week almost reached $48 a barrel, moving toward marginal costs for many producers’ near $50 or higher. Oil has rebounded from its April lows, but still has some work to do in order to reach the early January 2020 price of $63 a barrel. Natural gas also had a solid week and has returned almost 20% year-to-date.
Silver had a negative week, but copper and gold moved higher. Year-to-date, all three metals are up over 20%; however during the past three months, copper has been the only metal higher, up over 20% for this time period.
The average real yield for corporate bonds is now negative. The real yield of a bond is calculated by subtracting the rate of inflation from the nominal yield of a bond. One could measure inflation from the yield difference between, for example, 10-year Treasuries and 10-year Treasury Inflation Protected Securities (TIPS). The nominal yield of the Bloomberg Barclays Aggregate Bond Index (1.85%) is currently less than the 10 year breakeven inflation rate of 1.89%. We have seen this situation happen this year with US government debt; however now this phenomena is happening with US corporate bonds. Lower yields on corporate bonds could spur more debt issuances, which could increase the risk profile of corporate balance sheets.
US and International Economic Data Recap
Last week, jobless claims came in higher than expected, as over 850,000 Americans filed for unemployment insurance according to the Department of Labor, above Bloomberg consensus forecasts of 725,000 and topping all but one Bloomberg survey estimate. Continuing claims also missed expectations, tallying 5.8 million receiving ongoing benefits versus Bloomberg consensus of 5.2 million.
“The troubling rise in jobless claims comes on the heels of greater restrictions on activity to curb the spread of COVID-19,” noted LPL Financial Equity Strategist Jeffrey Buchbinder. “Thanksgiving holiday distortions may lead to lower claims next week and more stimulus could potentially be on the way soon, keeping us comfortable with our overweight equities recommendation as 2021 approaches.”
Last month, both headline and core inflation readings (excluding food and energy) came in slightly higher than the Bloomberg-surveyed economists’ consensus. Inflation is likely to pick up as the economy improves and may run a little hotter in 2021 than we’ve seen in recent years. We discuss the risk of a substantial inflation surprise the LPL Research blog titled Is Inflation Looming.
In light of all the economic, fiscal policy news and market data in the past month, next week’s Federal Reserve (Fed) meeting will be highly anticipated.
Looking Ahead
Next week, the following economic data is slated to be released:
- On Tuesday, we get data on November’s export and import prices along with last month’s industrial and manufacturing production.
- Wednesday is all about the Federal Reserve (Fed) meeting. November retail sales along with October’s business inventories and December’s Purchasing Managers Index will also be reported. Moreover, the December National Association of Home Builders’ Housing Market Index will be published.
- On Thursday, we get data on November building permits and housing starts. In addition, Thursday provides investors another weekly initial unemployment claims report.
- Finally, Friday brings November’s Leading Indicators and Q3 current accounts.
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